According to today's FDIC Press Release the number of institutions on the FDIC "Problem List" rose to 775 in Q1 up from 700 at the end of 2009.The total assets of these "problem" institutions rose to$431B up from $403B at the end of 2009. Only 41 institutions failed in Q1 (but we have added an addition 33 for Q2 to date).Sounding like a Jon Stewart quote Shelia Bair noted that "the vast majority of "problem" institutions did not fail." To me this is a little like saying that "the earthquake in Haiti did not kill everyone, so things aren't as bad as you think."On a brighter note the release said that the Deposit Insurance Fund (DIF) "improved" from a "negative" -$20.9B to only a negative -$20.7B. Happy days are here again!Further they reported that the FDIC's Liquid Resources stood at $63B a decline from $66B at the end of 2009. So let's do the math : $63B Liquid Resources minus $431B problem institutions equal -$368B add the -$20.7B in the DIF deficit and you get a rosy negative -$388.7B or about half of the original TARP total for all banks, AIG, Auto Industry and Fannie & Freddie. (This number is just for the FDIC)More good news, they reported the number of non current loans rose from 5.38% to 5.45% the highest level in the 27 years that institutions have reported these numbers.Direct Quote for the PRess Release:Chairman Bair concluded by stating, "There will be more failures, to be sure. The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility. But the positive signs I've outlined today suggest that the trends continue to move in the right direction." Oh, in that case please re-read the numbers above and double check my math.So let me end on a truly positive note. The FDIC reported that the nations 7,932 reported a collective Q1 profit of $18B. Of course that includes income from such famed banking institutions as Goldman Sachs, JP Morgan, Citi and BofA who all posted perfect games in Q1 trading whereby they made money each day for 61 consecutive trading days totaling well in excess of the $18B reported by the FDIC. But I'm not an accountant only and interested reader with a calculator.

While much attention and scrutiny has been given to the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the financial services industry, other recent regulatory changes will also have profound effects on the way financial institutions do business. One key trend: the need for independent collateral valuation, particularly regarding complex or hard to value collateral, such as many asset-backed securities, whole loans, real estate, pools of receivables and leases.

The motivation behind the new regulations is a perceived need for independent, conflict-free, professional judgment, without influence or pressure that could possibly be exerted by parties having an interest in the transaction. Driving this perception has been the massive federal loss exposure in the aftermath of the subprime financial crisis.

The portfolio valuation requirements of the 2010 Interagency Appraisal and Evaluation Guidelines[1] (which replace the 1994 guidelines) flesh out the new federal expectations; these changes will have application to a wide variety of institutions, including: federally chartered banks and those accepting FDIC insured deposits; fund managers and others who make representations about collateral to public investors; investment bankers; and rating agencies.

Given the regulatory trend, it appears certain to us that the Agencies will follow the lead of the Financial Services Authority in the United Kingdom, which has required financial services firms to engage outside experts to provide independent, conflict-free valuation and risk analysis. This requirement provides an institution with a defendable (i.e., independent) valuation of the portfolio components.

Pursuant to the Guidelines, each financial institution must maintain policies and procedures which establish standards for obtaining current collateral valuation information. The institution may employ a variety of techniques for monitoring the effect of collateral valuation trends on portfolio risk associated with its lending practices.

Changes in market conditions underscore the importance of following sound collateral valuation practices and monitoring when originating or modifying real estate loans and evaluating portfolio risk.
The Agencies implicitly are addressing three major risk exposures that drive the government’s interest in objective third-party collateral validation practices:

1. The FDIC scheme of depository insurance, which depends crucially upon the soundness of bank lending practices.

3. The potential government responsibility to bail out financial institutions deemed “too big to fail.”

The drafting of the Guidelines is a joint effort of the Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; Office of Thrift Supervision, Treasury; and National Credit Union Administration (collectively, the “Agencies”). The Agencies have committed to work together to ensure that real estate lending is conducted in a safe and sound manner.

Note: Contributors to this blog post include members of the NewOak Capital team.

On February 8, 2011, the Board of Governors of the Federal Reserve (the “Board”) issued a notice of proposed rule making under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The proposed rules establish criteria for determining whether a nonbank entity (1) is nonbank company that is “predominantly engaged in financial activities”, and (2) is a “significant nonbank financial company”. Both of these rules are important, because the Dodd-Frank Act gives the Financial Stability Oversight Council (the “FSOC”) the authority to determine whether a nonbank financial company shall be subject to the Board’s supervision, because it could pose a threat to the financial stability of the United States.

One of the necessary criteria for a company to be a “nonbank financial company” is that it be engaged “predominantly in financial activities”. Under the first proposed rule, a company would be “predominantly engaged in financial activities” if in either of its past two fiscal years, eighty-five percent of its consolidated annual gross revenues or consolidated total assets in that year were derived from or related to, respectively, “activities of a financial nature” or the ownership, control, or activities of an insured depository institution or any of subsidiary thereof. Additionally, the Board would have discretion to determine “based on all the facts and circumstances” that at least eighty-five percent of a nonbank company’s consolidated annual gross revenues or consolidated total assets are derived from or related to the aforesaid activities.

One factor, in determining whether a “nonbank financial company” is to be subject to the Board’s supervision, is the degree and nature of its connections with other significant nonbank financial companies and significant bank holding companies. In this regard, the second proposed rule defines a “significant nonbank financial company” as a nonbank financial company that is already supervised by the Board, or that had at least $50 billion of total consolidated assets as of the end of its most recently ended fiscal year. Furthermore, the FSOC may recommend to the Board that nonbank financial companies supervised by the Board report to the FSOC, the Board, and the FDIC on their credit exposure to other significant nonbank financial companies and significant bank holding companies. (A “significant bank holding company” is a bank holding company or foreign bank treated as a bank holding company that had at least $50 billion of total consolidated assets as of the end of its most recently ended fiscal year.)

These proposed rules are important to several companies in the equipment finance arena, because if any of those companies qualify as nonbank financial companies, then they could be subjected to supervision by the Board, similar to that imposed on bank holding companies, and could be required to report on their credit exposure to other significant nonbank financial companies and significant bank holding companies. It is as yet unclear how burdensome the increased regulatory oversight would be.